Rules 506(b) and 506(c): Exemption for Private Offerings of Unlimited Amounts
Rule 506 allows issuers to raise an unlimited amount of funds without registering under the Securities Act of 1933. Rule 506 does not allow any “bad actors” to be involved in the offering. Potential bad actors include issuers, affiliates, directors, officers, those who own at least 20% of the voting securities, underwriters, placement agents, or selling group members who have carried out “bad acts.” A bad act is one that caused the actor to be disciplined by the SEC, the Commodity Futures Trading Commission, or an industry SRO (such as FINRA).
An issuer that chooses to conduct its offering under Rule 506 must choose one of two offering types: Rule 506(b) or Rule 506(c). It must then abide by and follow that choice throughout the offering process.
A Rule 506(b) exemption is only available for offerings with no more than 35 non-accredited investors who are sophisticated; that is, they must possess sufficient knowledge and experience in financial and business matters to be able to evaluate the merits and risks of the prospective investment. To that end, they must be provided with extensive information about the issuer of the securities, usually in the form of the private placement memorandum (PPM). The number of accredited investors is unlimited.
Additionally, an investor may achieve the required level of sophistication with the help of one or more “purchaser representatives.” The term purchaser representative is defined in Rule 501(h) to mean someone who:
- • The purchaser acknowledges in writing to be his purchaser representative
- • Is financially sophisticated
- • Discloses any conflicts of interest to the purchaser
- • Is not an affiliate, director, officer, employee, or more than 10% owner of the issuer
In other words, if a prospective investor is guided by the counsel of an unbiased, experienced advisor, the inv